The world economy remains mired in a severe financial crisis, threatening decades of development progress in many countries. Emerging market economies are particularly vulnerable as the sharp contraction in capital flows from public and private sources is occurring in an environment of increased investor risk aversion. The World Bank estimates that the developing world’s need for external financing is likely to increase to $1.3 trillion in 2009, including current account deficits and principal repayments on private debt coming due. With declining capital flows, this would generate a financing gap of between $270 and $700 billion.
The World Bank is drawing on all available resources across the Group to provide rapid, efficient and coordinated applications to member countries. The International Bank for Reconstruction and Development (IBRD), which raises funds in international capital markets to finance the World Bank’s loan obligations with middle income countries, has pledged to ramp up credit lines for loans, guarantees and risk management tools to $35 billion this year and up to $100 billion over the next three years.
The World Bank is not relying on traditional financial applications only. Over the past several years, the Bank has moved away from the traditional approach of offering only development loans to providing customized financial applications in response to its clients’ diverse risk management needs. IBRD now offers an extensive menu of financing, credit enhancement and risk management products, as well as global capital markets expertise to help clients better manage financial exposures that may have unanticipated impacts on government resources.
BRD executes $25-35 billion of derivative operations per year to manage risk on its own balance sheet, as well as clients. IBRD’s AAA credit rating not only allows it to borrow high volumes at more favorable terms than other financial institutions, but also enables it to act as an efficient intermediary for members pursuing risk management strategies in a range of market environments.
This aspect of IBRD’s work has assumed greater importance in the current climate as a means for countries to reduce borrowing costs and manage volatility in exchange rates, interest rates, and commodity prices.
Indonesia, Mexico, and Colombia are among countries that have recently partnered with IBRD as an intermediary to pursue risk management strategies in the current market environment.
The impact of the crisis on sovereign balance sheets amidst turmoil in the capital markets has highlighted the importance of another important area-sovereign debt portfolio management, including contingent liabilities. Reducing exposure to market risks and avoiding significant increases in debt-servicing costs can free up resources and protect fiscal priorities. And given increases in investor risk aversion, prudent debt management is also important for a country’s reputation in international financial markets.
The World Bank Treasury’s advisory services are covering the full span of public debt management activities, including strategy formulation and execution, risk management, governance, international capital markets access and capacity building.
Clients also benefit from a range of public goods on international sound practices, training programs, and outreach events.
IBRD’s conservative capital structure and finances puts it in an excellent position to help its members sustain key development programs through this very tough economic environment.
D.C.